Car Payment Reduction

[Gjowers]

that's a pretty big monthly income. surely there is more fat you can trim from your budget. I would suggest getting bugeting software like Quicken. Or, if you happen to use bank of america, it has a free program with online banking that I prefer over Quicken. Once you start categorizing and tracking expenses you'll be surprised to see how much you are really spending. For me, it was shocking to see how much we spent on eating out. It never seemed like a big expense because we'd go to modest restaraunts and spend less than $20 for the 2 of us. But that adds up and before you know it you've spent $400 dining out.

That level of income should allow you to sock away major bucks.

To help put things in perspective, I would suggest 3 books, 1) Get Rich Slow, 2) Affluenza, and 3) Total Money Makeover. Get them from the library.

[cachorro]

Thanks - here are some answers:

cptacek:

We've already done that recently and have also included some utility paybacks which allowed us to reduce the losses from $1,750 down to where they are now. Thankfully and sadly the huge amount of foreclosures in the area where our properties are have driven rents up since people loosing their homes need a place to live. For now - that's as high as its going to get (the rental income that is).

Gjowers:

Agreed - thats been our major problem. Small expenses here and there, eating out, gifts, lunches, and of course unforseen expenses like car problems, appliances dying out, etc. have continually eaten away at our discretionary income. I use BofA online banking to manage all payments since there are so many of them with all the investment properties and that's been helpful. I'm going to continue to trim away at it best I can to free up more funds to sock away more money.

We are in Northern California so that income is not that much based on the expenses you have to deal with here but I agree - with discipline we should be able to save and get out of debt sooner rather than later. If you think about it 6 months emergency fund for us (assuming no vacancies on our investment properties) is over $80,000 so it will take some time to get there but I have to find a way to do it.

Thanks for the book recommendations, we are avid readers so we'll pick those up.

minnie1928:

Yes, our car loan is at 5.25% and the equity line is at 4.00% right now. Assuming we continue to make at least the same payment and soon to be more It should allow more money to go to the principal. I agree with you - in that normally it could be risky in that we could take the money and use it for something else but those days are gone. Assuming we stick to the plan (and we are) it would make sense to me to have the lower interest to enable me to pay it faster.

We have stopped using the cards completely. Again - thankfully I've paid those off to 0 so we don't have any CC debt at this point and won't anymore.


One last question I wanted to ask. In the past between buying a car and leasing a car I had always gone for the leasing option. I had done this with the rationale that it didn't make sense to sink in after tax dollars into a depreciating asset (car) where the money will be immediately loosing money. I would instead take that money, save it (CD or invest it) and only pay the lease payment. At the end of the lease I can walk away from it and not have to worry about the continued depreciating value on that car.

This was always based on buying a new car compared to leasing a new car. I understand now that buying a used car is the better way to go to buying a used car - but I'm not 100% clear on why it wouldn't make more sense to lease it since I can write part of it off and not own a depreciating asset.

To lease or not to lease - that is the question?

thanks again for all your help.

[minnie1928]

One last question I wanted to ask. In the past between buying a car and leasing a car I had always gone for the leasing option. I had done this with the rationale that it didn't make sense to sink in after tax dollars into a depreciating asset (car) where the money will be immediately loosing money. I would instead take that money, save it (CD or invest it) and only pay the lease payment. At the end of the lease I can walk away from it and not have to worry about the continued depreciating value on that car.

This was always based on buying a new car compared to leasing a new car. I understand now that buying a used car is the better way to go to buying a used car - but I'm not 100% clear on why it wouldn't make more sense to lease it since I can write part of it off and not own a depreciating asset.

To lease or not to lease - that is the question?

thanks again for all your help.

Ok, I'm going to take a crack at this. What is the difference between booking depreciation expense and lease expense? I mean it's expense either way? Your assets decline whether you have a depreciating asset or a cash lease payment to make each month.

I'm not a CPA and I didn't sleep at a Quality Inn Express last night, but I do have an accounting degree.

[cachorro]

Thanks and yes - as far as tax implications go you are right. But to me there is a difference in taking say $12-15k of CASH and putting it into a vehicle that will immediately begin depreciating (hence that money is loosing value every day)

Whereas in a lease - you are paying a monthly payment yes - of say $295/month but the rest of the money that you are not using since you are not buying the car can be placed on a CD or another investment to earn a return no? This helps to offset the "decline" in the payment.

If you put all that money into the car then you have no way to earn a return.

I am totally open to better understand this better as this issue has never been 100 % clear to me.

[minnie1928]

Thanks and yes - as far as tax implications go you are right. But to me there is a difference in taking say $12-15k of CASH and putting it into a vehicle that will immediately begin depreciating (hence that money is loosing value every day)

Whereas in a lease - you are paying a monthly payment yes - of say $295/month but the rest of the money that you are not using since you are not buying the car can be placed on a CD or another investment to earn a return no? This helps to offset the "decline" in the payment.

If you put all that money into the car then you have no way to earn a return.

I am totally open to better understand this better as this issue has never been 100 % clear to me.

Something else to factor in is the implied rate of financing on a lease. You might be earning money on the un-spent part of the purchase price (does that make sense?) but you are still paying for the privilege of leasing. And at the end of the day, you don't have a car.

I understand what you are saying about the lump sum expenditure and the return on that money being negative. But what if we changed the transaction to more apples to apples...what if you took a loan out for the vehicle? That removes the lump sum expenditure. You have a liability either way (lease or loan).

My former employer always bought their company cars and several times they were driven well past their depreciable life. That's something you just can't do with a lease.

Sorry I've muddied up the water on this...

[jIM_Ohio]

I think you need to rethink your whole set of financial issues.

1) you have an outgo of 160k annually. To suggest this could not be cut more is silly- I make 30% less than you, and we find around 5-10 ways to cut expenses every year.

2) You have a suggested surplus of $31k-55k annually. That is a HUGE range. I think if you re-think how you do things you will find a way to narrow that range down and feel better about your finances.

3) You have variable incomes. Some of the typical financial guidelines out there do not deal with this issue... yet this issue could influence every decision you make.

Here are the steps you need to look at
1a) calculate base salaries for both income earners (is there a base, or is income 100% commission?).
1b) caluclate base expenses (only what is needed-food, mortgage, utility and groceries)
2a) calculate expected total yearly income (include commissions)
2b) calculate expected total yearly expenses (include nanny, cars and other similar expenses which you need if you work full time).
3) You need a financial independance plan. I suggest setting aside 20% of gross pay for financial independance. This amount needs to be know based on income 1a and 2a.

For example if base pay is 50k, 20% of this is 10k- so you need to set aside 10k (or $840/month) in the budget calculated for 1b). Gross salary is 216k, 20% of this is $44k ($3600/month on average). Make sure the $3600/month is included in budget on 2b).

Meaning your budgets need a "pay yourself first" line item. 20% of pay is paid to YOU first.

When you need a car next time, because you paid yourself first, the money is there to pay cash for it.

You are losing $1750/month on the rentals, you did not list what you are under on those properties (I am going to guess you are under by 200k on each loan; and each property could be sold right now for 300k to give you some numbers to run).

$1750/month is $21,000 per year. So you are spending 21k more this year than is listed in either budget above because you are holding the property.

If property is worth 300k now and you owe 500k, in 10 years you will have paid the 200k difference whether you sell or not. Sell now you can write off a significant amount of the loss. In 10 years you will have depreciated the 500k so much that you have little loss to write off AND you paid the loss already (21k per year). The property would have to double in value in 5-10 years just to make this even appear appealing.

You did not compare the rent being paid to the mortgage on the rental. You did not compare the deficit owed to the bank on sale to the deficit your checking account sees each month.

Just because you can "afford" to pay the difference with cash flow does not make it a good idea. You are still paying more than the property is worth. The logic you used to justify not raising rents puzzled me- if people are renting more, demand is UP, so prices go UP. Unless there are vacant rentals around (high supply), no reason for rents to stay low.

You did not answer my depreciation question on the rentals- have you claimed the depreciation, and if so, does it offset the $1750 loss each year right now?

If you sell you can claim more losses which should reduce taxes on other income you have this year... in addition some cash flow should be freed up (you are paying $1750/mo if you keep property; if you can get a loan for the balance you owe after selling, and this loan has a payment less than $1750, I just saved you money).

If you are making 216k after taxes, you need to make sure you invest in things which do not cost you money and appreciate with reasonable success.

[spicy14lingo]

I am in a similar situation. The only thought that I came up with is to see how much a dealership would give me on a trade and then pick a newer car (or at least one with fewer miles) for that price. Then if the bank would absorb what I owe on the truck into the new loan, my payments would be the same and I would have a vehicle with less miles on it by the time it was paid off. (My current truck has almost 100k miles on it and I will still be paying for it for another three years.)

This plan made sense in my head, but is that even how it works? Is it a good idea? Some insight would help